What to do with my savings I have before med school

[ftp902]

Thanks in advance everyone.

I am currently working full time and I will have saved up around 13000 before I start medical school. (paid off all my undergrad loans). I have been thinking what would be most financially savvy way to use this money. I actually contributed about $2000 dollars into Roth IRA in late 2014, but I recently (early 2015) took it out for no apparent reason.

And my first question is can I just put 2000 dollars back into the account and would that $2000 still be a part of 2014 contribution, or is it 2015 contribution? How does that $5500/year cycle start and end?

My second question is, should I max out Roth IRA or try to use this money to take less loans? I think I can use this money to pay rent or for living expenses for one good year in medical school if I do not contribute any of this into Roth. As I expect 6.5%+ interest rate from loans, I am not sure putting this money into IRA is the right decision as I expect less than 7% return from IRA fund. Could someone also explain how putting this money into IRA will low EFC too?

Or, should I try to use this money to travel? I will have about 2 months and I was thinking about using this fund for traveling in Europe and Asia for about 1.5 months. I know this is not the most financial savvy way to spend money, but starting medical school refreshed is not a bad investment IMO.

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[KM Awad]

#1. [Removed as you won't be taxed/penalized as others have noted]

#2. I would not at this stage necessarily max your Roth because you're right the interest rate will likely be 6.5%. I would prefer to be in less debt and I think all med school should focus on being in less debt because debt limits your choices. I'm not as extreme as Dave Ramsey in his views on debt (though in my book, I go a little hard on debt). I've just seen it so many times limit people's options. And though $2,000 (or more, hard to tell in your post) is little, getting into the mentality of less med school debt, will be much better for you in the long run.

#3. The vacation is up to to you (see points above). I can't argue with taking a break but only if it's financially sound. Choices are also never black or white, Option A or B. There is always an option C, like a cheap road trip that will cost you a couple hundred dollars??

 

[ftp902]

Thank you for your post.
Regarding #1, I will not be subject to 10% penalty because I took out my contribution not my earnings and contributions are not subject to penalities but earnings are. I have talked about this with financial expert at the firm to make sure. I definiltey agree with your answer to #3. I can try to find a middle point where I can probably go to a cheaper road trip around the nation.

 

[Wealth Anatomy]

1: Yes, you can put $2,000 back into your Roth IRA and designate it as a 2014 contribution as long as you do it prior to April 15, 2015. The contribution limits ($5,500) are set by calendar year but you can make a contribution for a prior year as late as the 15th of April of the following year.

You do not have to pay the 10% penalty tax because the $2,000 does not exceed your contributions to the account.

2. You could make the case that you'll earn a higher rate of return in the Roth IRA than the interest on your student loans but, if you're looking at a short period of time, who's to say the market won't be down in the next 3-5 years.

I don't think that I would invest in the Roth right now and hold the money as a reserve (emergency fund) or living expenses throughout the year.

3. I wouldn't presume to tell you not to go on vacation. Just remember that the true cost of the vacation will be more than you are planning on spending. You'll also have to tack on the interest rate of the student loans that you'll have to take out because you spent the money on the trip. True cost of trip=money spent + interest on student loans. I like KM Awad's suggestion of an inexpensive trip.

 

[KM Awad]

Thank you for your post.
Regarding #1, I will not be subject to 10% penalty because I took out my contribution not my earnings and contributions are not subject to penalities but earnings are. I have talked about this with financial expert at the firm to make sure. I definiltey agree with your answer to #3. I can try to find a middle point where I can probably go to a cheaper road trip around the nation.

I see. You didn't pull out your earnings. I misundestrood this.

Road trips can be fun.

 

[QofQuimica]

And my first question is can I just put 2000 dollars back into the account and would that $2000 still be a part of 2014 contribution, or is it 2015 contribution? How does that $5500/year cycle start and end?

As others have already said, yes, as long as it's in before 4/15.

My second question is, should I max out Roth IRA or try to use this money to take less loans?

I vote for maxing out the Roth, for two reasons. First, that money can then grow tax-free for the rest of your life. Assuming you are ~22 years old, that could be 50+ years of tax-free compounding, maybe more if you wind up bequeathing this money to your heirs. Second, your ability to contribute directly to a Roth will go away for the rest of your working life once you become an attending. You can still back-door contribute (for now, anyway), but there's no guarantee the IRS won't close that loophole some day. Obama wants to close it.

I think I can use this money to pay rent or for living expenses for one good year in medical school if I do not contribute any of this into Roth.

If you can live on $5500/year, that's extremely impressive. Even if you mean that you'd be living on the whole $13,000 for a year, assuming you're not exaggerating, I don't think you're going to have to worry about paying down your loans after med school. A little over $1000/month for living expenses is pretty darn frugal.

Or, should I try to use this money to travel? I will have about 2 months and I was thinking about using this fund for traveling in Europe and Asia for about 1.5 months. I know this is not the most financial savvy way to spend money, but starting medical school refreshed is not a bad investment IMO.

If you're serious about wanting to use the money in a financially savvy way, you can't possibly be serious about wanting to blow the whole wad on a trip. Why not vacation on the cheap here in the US (or in Latin America) instead of ending up with no IRA *and* full loans? Don't college kids go on road trips and stuff way too many people into one hotel room to save money any more these days???

All kidding aside, here's what I'd do with the money:
$5500 to max out your Roth for 2014
$5500 in an online savings account for an emergency fund/cover any unexpected med school expenses
$2000 for vacation/fun stuff over the summer before med school

And finally, kudos to you on getting all your UG debt paid off. You'll be glad you did that.